How long is a piece of string?
It’s a throwaway line that gets tossed out when someone asks a question to which there is no single best answer.
And that’s exactly what I have to say when someone asks if Commercial real estate is for them.
It does tend to attract a specific kind of people. More entrepreneurial types rather than “mum and dad” investors. Commercial attracts people who actively seek out ways to get greater returns and to take more proactive action to put those strategies into place.
So here are a few questions to ask yourself before you start investing in commercial:
What Are Your Goals?
This one is key to every financial decision, and it’s the same for commercial.
Do you want the annual cash flow, are you looking to hold and sell for the capital growth? Are you looking for properties to develop?
Knowing the answers to these questions – having clearly defined goals is going to inform how you proceed with your investment process.
From my point of view Commercial is best for generating cashflow. Yes you can create capital growth, you can use it to develop sites, but to me- front and centre is the cash flow.
You can do all those other things with various other property strategies – but commercial has no peer when it comes to generating you passive income.
What Is the Outlook for the CRE Market?
This is a big country so for me there is always going to be some places where things are tanking and other places where they are rocking on. Part of your due diligence is going to be working out which areas are going well and are good for one term commercial investment.
If you head over the google and type in “economic profile followed by a town name” you can scrape tons of good information from which you can infer two things:
1-whether the town has a strong economic base worth investing in.
2-what type of commercial has the strongest growth and activity.
This will inform you as to exactly what type of property…. and where.
What Type of CRE Do You Want to Invest In?
CRE covers a wide range of property types. Office parks, warehouses, industrial buildings and malls are all CRE properties. So are large apartment buildings and mixed-use buildings that combine, say, offices with a residential tenant. Each of these types have a profile for the amount of involvement required of an investor and the investment picture.
There is no substitute for a detailed financial analysis of the properties you are thinking about. At a minimum, you should know net income (income less expenses), expected return on investment (the cash flow less any investment costs), the cash flow (net income minus any debt financing payments), the capitalization rate, the total return on investment (cash flow, accrual of equity, appreciation of the property and taxes), and the cash-on-cash return.
When working out the numbers I’ll go as far as factoring in purchase costs, travel expenses to inspection the property, even the burger I ate while I was there. That way I get 100% accurate cost/profit analysis.
What Is Your Risk-Reward Profile?
Before you rush out and pull all the equity out of your home or other properties and throw them at commercial, think about your risk-reward profile for all your investments and how commercial will contribute to your overall portfolio.
For example, many investors want to move into real estate investments because other types of investments are getting low returns and/or they want to diversify their investments. Others simply run out of cash and borrowing capacity and need the cash flow to be able to keep investing.
It’s all very well going at this like a bull at a gate but it does pay to consider a carefully planned balance of cash flow and growth across different styles of property.
What Do Your Tenants Contribute to the Investment?
There are some great features you can include in a commercial lease but many of the advantages only really show up in certain types of property.
For instance small business tenants who are open to the public, for example, have a vested interest in the upkeep and maintenance of the property. A better-maintained property will draw more clients and customers.
A factory or warehouse, in contrast, may have less incentive to maintain and upkeep the properties. That may place more responsibility for upkeep and maintenance on the property owner.
It’s one of the reasons why I like retail. But don’t just take that as gospel. I know others who swear by industrial for instance because they can get even higher returns and they are cheaper to build (if you want to go into construction of commercial.
Are You Comfortable With Landlord Responsibilities?
Commercial landlords often have fewer responsibilities than residential ones. I always suggest not managing your own properties, which means you need to factor in management fees into your initial expenses.
However you also need to factor in correct insurances since most businesses have many more people entering the commercial property than the average residential property.
That’s more opportunity for broken windows and damaged displays. Yes you tenant will be responsible for all of this, but remember it’s your property. If you rely on the tenant to have everything up to scratch it could end up biting you on the ass. Cover yourself. If you never need it then – good! If you do – you’ll be grateful you’ve got it.
What lease options are available?
The great thing about commercial leases is that you can pretty much negotiate anything you want. Commonly that means that the tenant pays your rent, but also pays the expenses, rates and even the land tax.
Annual rent increases should always be in there – there’s a few ways to add that one in. But there are also a host of other things that you can add into a commercial contact that can help protect you and the tenant. These things can really make a huge difference when it comes to keeping your tenant for years.
So going back to the big question of whether commercial is right for you there are a few things you need to look t before you jump on in
For me the answer is and always will be is the bear a catholic. Or does the pope shit in the woods.
Basically, a resounding YES. If you get a yes from answering these questions then jump on in – the water’s fine.